How to Make Sense of the SBA Loan Opportunities
Published April 1, 2020
Currently, virtually every business is looking for ways to ease the financial burden the COVID-19 pandemic has caused to their business. In answer to this overwhelming economic and financial crisis, Congress and the SBA have initiated two primary loan programs to help small businesses. These are federally backed loan programs with the potential for deferred payments and relatively low interest rates.
Your business may be eligible for the Economic Injury Disaster Loans (EIDL) and/or the newly enhanced 7A loans.
SBA 7A Program – (Small Business Administration 7A “Paycheck Protection Loans“)
In a move designed to keep small businesses afloat, the CARES Act (Coronavirus Aid, Relief, and Economic Security Act) SBA (Small Business Administration) introduced “Paycheck Protection Loans” which will provide businesses with fewer than 500 employees — including sole proprietors and nonprofits—access to nearly $350 billion in loans under Section 7 of the Small Business Act during the “covered period,” which runs from February 15, 2020 through June 30, 2020. These loans are disbursed by local banks and credit unions who are authorized and approved to do so.
SBA EIDL Program (Small Business Administration Economic Injury Disaster Loan Program)
The U.S. Small Business Administration (SBA) is offering federal disaster loans for small businesses and not-for-profit organizations who have suffered economically as a result of the coronavirus pandemic. The Economic Injury Disaster Loan is currently eligible for the January 31, 2020 – December 31, 2020 covered period. These loans are applied for and disbursed directly from the SBA. No banker is involved.
Thankfully, under both programs, the definition of small business is liberal and follows the SBA and FLSA guidelines based on number of employees (SBA 7A Program) and revenue of the business (SBA EIDL Program). In some cases, employees in two different businesses can be considered jointly employees for this purpose. We can help you determine how this affects you and your businesses based on the SBA guidelines.
Which loan is best for me?
If you do not have employees, the SBA EIDL seems to be the way to go. It may be faster to obtain and has potentially a longer deferral period with a slightly lower interest rate. You can receive $10,000 almost immediately according to the SBA rules.
If you do have employees, the SBA 7A Loan is the most potentially beneficial program so we would suggest that you start with that one. In order to do so, the first step is to contact your bank and inquire as to whether they are set up to make loans under the program. Most banks and credit unions are already set up to do this and they are all gearing up for this very large effort. If there is seasonal component of your business and you have more employees during certain periods of time, you need to review the rules more closely for a strategy as to when to apply for the loan.
The reason that we recommend that you start with this program is that it carries with it a potential loan forgiveness program on certain employee wages. And that loan forgiveness is potentially tax free. There are several caveats that must be reviewed to make sure your business can meet the loan forgiveness provisions.
How much can be forgiven?
The amount to be forgiven is the sum of the following payments made by the borrower during the 8-week period beginning on the date of the loan (see reductions/limitations below):
- Payroll costs including gross pay and most benefits excluding payroll taxes; gross pay in excess of $100,000 annualized is excluded.
- Mortgage interest
- Certain utility payments
What can the forgiveness be potentially reduced by?
There is a provision that reduces the amount that may be forgiven if the employer either:
- Reduces its workforce during the 8-week covered period when compared to other periods in either 2019 or 2020, or
- Reduces the salary or wages paid to an employee who had earned less than $100,000 in annualized salary by more than 25% during the covered period.
This reduction can be avoided, however, if the employer rehires or increases the employee’s pay within an allotted time period.
So if you qualify as a small business, there seems to be a real incentive to start the process of applying for this SBA 7A Loan.
Our advice in taking this route first will also put you in direct contact with your own banker who can expedite this process on your behalf. Strong existing relationships will be key here but if you feel you want to consider using a different bank, please contact us and we will quickly get you in touch with a banker that will work with you on this process.
MCM’s role in this process will be to assist you in efficiently providing the information that you need and giving you expert guidance in how much to request to maximize your benefits under the government programs.
Please reach out to your MCM relationship person as soon as you can and we will help you start this very important process.
In order for you to understand more about the SBA 7A Program and the SBA EIDL Program we have included some very detailed answers to frequently asked questions.
- Click here for SBA 7A “Paycheck Protection Loans” frequently asked questions.
- Click here for SBA Economic Injury Disaster Loans frequently asked questions.
If these questions don’t answer a concern that you have, please feel free to send an inquiry to email@example.com and we will get back to you as soon as possible.
Nothing in this document should be construed as providing tax advice. Please consult with your own professional tax advisor. In addition, this document represents the information that we have up to the date the presentation was made and cannot be relied upon for additional updates beyond that date.